2.24.22 UPDATE: We've been listening to your feedback, and we've made some design changes. We're releasing a new version that addresses the most common themes and makes it easier to achieve the previ...
Updated Feb 24, 2022
Version 12.0
Blog Post
Microsoft botched this one for sure, but if your entire OneDrive fits on your internal drive, you can get the equivalent to turning off Files On-Demand. You have to be willing to not store loose files and folders at the top level. For example, put a single folder in OneDrive called OneDrive Documents. Then right-click that folder and select Always Keep On this Device. You don't have to go down into subfolders and do that for them as well, although you *can* do that if it helps the process along. The download could take a long time. Mine took perhaps six hours for 15,000 items taking 30GB. Your mileage may vary. Wait for it to settle in. From then on all contents of OneDrive Documents, including subfolders to any depth, are automatically ready for offline use, and are backed up by Time Machine, CCC, and presumably other backup services. You have essentially turned off Files On-Demand.
I realize for many of you the above won't work. Also having it happen with no warning is terrible. I'm fortunate to be retired and I had time to immediately go to work on getting everything back in order, including multiple communications with Microsoft. But, assuming your OneDrive fits on your internal drive, once you're set up it's good to go. You definitely do not have to download each file or folder manually. Once the re-download is complete, Autosave will work, local backups will work, and you can work with all files offline.
Knowing the icons is key, and Microsoft has not made updating their support materials a priority. The Finder will display a white underlined checkmark inside a grey circle for all files and folders selected to Always Keep On This Device. There will be a cloud symbol beside it (in list view) if the download hasn't completed yet. Again, that could last for hours while you're fixing the damage Microsoft has done. When the whole process is complete every file and folder will have the underlined check mark and no cloud icon. And new files and folders (below the top level) will automatically be kept on the device. You're back in business.
As many others have pointed out there was no requirement for Microsoft to force Files On Demand.